No Further Austerity for Spain, Says Rehn

Peter Spiegel, Financial Times

Thursday, 15 Nov 2012 | 2:01 AM ETFinancial Times

SHARES

Spain will need no further austerity measures until the end of next year even though it will easily miss its deficit targets, the EU's top economic official announced on Wednesday in the clearest sign yet Brussels is backing away from an austerity-focused crisis response.

Carlos Sanchez Pereyra | Getty Images

The clean bill of health from Olli Rehn, EU economic commissioner, does not set new budget targets for this year or next. Instead, his assessment gives approval based on the structural reforms proposed by Madrid as part of its budget plan unveiled in September.

"We are not so much focused on the nominal targets, even though they often make easier headlines because they are exact percentages," Mr Rehn said. "To my mind, [it is] both the right way of doing it from an economic point of view but also the correct way of applying [EU rules]."

The decision, approved by the full European Commission on Wednesday, came on a day that anti-austerity demonstrations by labor unions gripped capitals in several struggling euro zone countries, particularly Spain and Portugal, where schools closed, public transport was brought to a stop and air travel was disrupted.

Mr Rehn cautioned against reading the decision as a euro zone-wide shift in policy, saying Brussels would need to "look at every country case by case". He added that Spain must still do more in 2014, when Madrid is required to get its budget deficit, which was 11 percent of gross domestic product at the end of last year, down below the EU threshold of 3 percent.

But the decision sends a strong signal that the European Commission is moving closer to the International Monetary Fund's view of the crisis, which includes more flexibility for struggling countries such as Greece, where fixed deficit targets have forced drastic budget cuts even during deep recessions.

The assessment must still be approved by euro zone member states, including Germany, where officials have frequently insisted on sticking firmly to deficit targets. But under EU rules adopted as part of Brussels' crisis response, Mr Rehn has sweeping powers to set economic timetables that are difficult for national governments to overturn.

If approved, the change removes a major hurdle for Mariano Rajoy, Spain's prime minister, to seek economic assistance from the EU and European Central Bank. Mr Rajoy has repeatedly argued he will not seek a rescue – expected be an EU-ECB bond purchase program aimed at lowering Madrid's borrowing costs – if it comes with further austerity measures.

"We have now concluded for 2012 and 2013, Spain has taken effective action," Mr Rehn said of a possible rescue programme. "The box is ticked as long as implementation is solid and convincing."

Significantly, Mr Rehn's approval means Madrid will not have to make additional cuts to its pension system, a political red line that Mr Rajoy had drawn but that many in his inner circle feared would be on the Brussels chopping block. Madrid did not immediately respond to the decision.

Spain was supposed to reduce its deficit to 6.3 percent of GDP this year and 4.5 percent next year. Despite the insistence of Luis de Guindos, finance minister, this week that those targets would be met, recent EU projections predict an 8 percent deficit this year and 6 percent in 2013.